CFM95395 - Interest restriction: groups, periods and financial statements: the worldwide group: investment managers

TIOPA10/S454A

Investments held by investment managers

Investment managers will often invest in various groups alongside third parties through a vehicle (“S” in the legislation), typically a partnership. The investment manager will be required to consolidate S (and the entities below it) where certain conditions are met. For the purpose of TIOPA10/S473 there would therefore be a single worldwide group encompassing the investment manager as well as each investment.

This could be problematic where each investment is run independently because the calculation of any CIR disallowance would depend on the financial results of a notional wider group of otherwise unconnected businesses. The rules therefore exclude certain entities from the investment manager’s worldwide group provided all three of the following conditions are met:

Condition 1

An entity (“S”) is a member of a worldwide group because other group companies both:

  • manage S; and
  • hold rights or interests in S.

It does not matter whether a single group company both manages S and holds rights in it, or whether one group company manages it while another holds rights in it. For example, where S is a partnership, one group company may be the general partner while another group company may have an investment management agreement with the partnership. This will still meet the management condition above. There is no requirement in the legislation that S should be a partnership or other fiscally transparent entity.

Condition 2

The entity managing S does so in the ordinary course of carrying on a business of providing investment management services.

There is no specific definition of “investment management services”, so it should take its normal commercial meaning. Investment management services are normally subject to regulation and an appropriate definition of “investment manager” is provided in the Glossary of the Financial Conduct Authority (FCA) Handbook. Except in the listing rules, an “investment manager” is a person who, acting only on behalf of a client:

  • manages designated investments in an account or portfolio on a discretionary basis under the terms of a discretionary management agreement; or
  • manages designated investments in an account or portfolio on a non-discretionary basis under the terms of a non-discretionary management agreement.

So, for S454A to be in point there has to be an entity, S, with the nature of a fund which benefits from such investment management services. It is unlikely that this will be the case in a multinational group of companies, even a diversified conglomerate.

Condition 3

The management of S is not coordinated with the management of any other person or entity.

Entities to be excluded from the worldwide group

Prior to changes made in F(2)A23, TIOPA10/S454A simply excluded all entities below S from the investment manager’s worldwide group.

For periods of account of worldwide groups that begin on or after 1 April 2023, the entities to be excluded depends upon whether S is transparent (such as a partnership) or opaque (such as a company).

If S is transparent, then all entities below S continue to be excluded from the worldwide group. S will therefore remain in the investment manager’s worldwide group.

If S is opaque, then S and its subsidiaries are all excluded from the worldwide group. S is therefore now excluded from the investment manager’s worldwide group.

Example 1

X Plc is an investment manager which invests in a retail group (Alpha Group) alongside several third parties. The investment is held via a transparent entity (“S”) with the top company in Alpha Group, A Ltd, sitting directly below S.

X Plc draws up consolidated accounts and it is required to include S, and Alpha Group, because a member of the worldwide group manages S and holds rights in that entity. The management of S is not coordinated with the management of any other person or entity, however, and TIOPA10/S454A will therefore be in point.

Alpha Group will therefore form a worldwide group in its own right comprising A Ltd as the ultimate parent and all its consolidated subsidiaries, in line with TIOPA10/S473. S will remain a member of the X Plc worldwide group.

If S was opaque, and the worldwide group’s period of account began after 1 April 2023, then the analysis would be different in that S would be excluded from X Plc’s worldwide group alongside its subsidiaries. Alpha Group would continue to form a worldwide group in its own right with S as the ultimate parent rather than A Ltd.

Example 2

Following its investment in example 1, X Plc makes an additional investment in a manufacturing group (Beta Group) alongside third parties. The investment is held via an entity (“T”) with the top company in Beta Group, B Ltd, sitting directly below T. T is managed by the same group company which manages S and a different group company also holds rights or interests in T.

The group company which manages S and T realises there are benefits in coordinating the management of S and T such that Alpha Group is directed by that company to source a product it sells from Beta Group. Because of this coordination, TIOPA10/S454A(1)(c) is not satisfied, meaning Alpha Group and Beta Group will both be included in the worldwide group of which X Plc is the ultimate parent.

Example 3

Swan Ltd, a non-UK company quoted on a stock exchange is 60% owned by a parent (Parrot Ltd) and 40% owned by a large number of portfolio shareholders. The Swan group is a conglomerate, with sub-groups conducting business in a range of industries, one of which is banking. These sub-groups are held by sub-holding companies which are direct subsidiaries of Swan Ltd.

Parrot Ltd has a subsidiary Magpie Ltd, which provides management services to Swan Ltd and some of its subsidiaries and to other subsidiaries of Parrot Ltd, not held through Swan Ltd. These services are essentially the types of management services that might be expected within a diversified group, primarily designed to assist the subsidiary groups in running their businesses profitably. Magpie Ltd also assists Parrot Ltd in terms of stewardship of its subsidiaries.

Under IAS, Parrot Ltd controls Swan Ltd as a result of one or more other members of the group managing Swan Ltd and holding rights or interests in relation to Swan Ltd. It would almost certainly also control Swan Ltd, regardless of any management functions that might be exercised by Magpie Ltd. That in itself does not necessarily prevent S454A from applying.

However, the services provided by Magpie Ltd do not have the character of investment management services for Swan Ltd, seen as a fund in corporate form. It is not managing the subsidiaries of Swan Ltd as a portfolio of investments to be acquired and sold, with a view to maximising income and/or capital gains. Instead, it is seeking, through providing management services, to ensure the profitable operation of the underlying businesses. Whilst the value of the direct subsidiaries may be increased by the provision of services, this is an indirect benefit; the focus of Magpie Ltd is not to advise on the composition of an investment portfolio.

Accordingly, as Magpie Ltd is not providing investment management services to Swan Ltd, S454A is not in point where Swan Ltd is “S”.